• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Aarati Krishnan

Once feedstock issues are sorted out, the company can pep up production.

INVESTORS with a long-term investment perspective can consider buying the stock of Rashtriya Chemicals and Fertilisers (RCF) at the current price of about Rs 35.

Near-term growth in the company's earnings may be slow, on account of constraints in feedstock availability and the company's large equity base.

However, with its large manufacturing capacity and low levels of debt, RCF has the potential to substantially ramp up production in its units, once the glitches in input availability are resolved.

The large tracts of real estate held by the company, carried much below their actual value in the books, may also act as a further buffer to stock valuation.

RCF's manufactures urea and complex fertilisers at two key locations in Thal and Trombay, with capacities to produce 18 lakh tonnes of urea at Thal and 10 lakh tonnes of urea and complex fertilisers at Trombay. This makes it one of the largest nitrogenous fertiliser producers in Asia.

The company also manufactures a range of organic chemicals such as methylamines, methanol, ammonium bicarbonate and ammonium nitrate.

The fixed cost structure for RCF's fertiliser units is low on account of the vintage of its plants. However, inadequate availability of natural gas, the cheapest feedstock for urea, has forced RCF to use naphtha as a supplementary feedstock. This has pushed up the costs of production, leading to low profit margins.

Though RCF has signed an agreement with GAIL for gas supplies from the upcoming Dahej-Uran pipeline, the implementation of this project has been delayed.

The long-term prospects for RCF's units, especially the one at Trombay, will depend to a large extent on the availability of natural gas feedstock for its projects.

But this is an industry-wide problem and, given the need to bridge the widening deficit in fertiliser supplies, a solution is likely to be negotiated within the next couple of years.

In the meantime, RCF has made substantial progress in improving its operating efficiencies. A debt restructuring exercise has substantially trimmed interest costs and reduced the level of debt in the balance-sheet to less than a fifth of the net worth by March 2004.

A modernisation project at Thal has helped cut down on energy usage and a similar revamp is in progress at Trombay. RCF has also reduced staff costs through a VRS.

These initiatives have helped RCF post strong profit growth in the current fiscal. Its profits before tax for the nine-month period ended December 2004 were at Rs 129 crore, excluding non-operational items. This represents a 55 per cent growth over the same period last year. Sales growth too was strong at 31 per cent, reflecting the buoyancy in fertiliser sales.

Considering the superior operating parameters of private producers, the RCF stock may seem stiffly priced at its current price-earnings multiple of about 12 times its trailing earnings.

However, given the considerable potential for a ramp-up in output and earnings through better utilisation of capacities, the stock may reward a patient investor.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Fine-tuning the Takeover Code — Better bargain for shareholders

Copyright © 2005, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line